The number of cannabis mergers and acquisitions has increased significantly over the past few years as investment in new markets, an increase in debt financing, and an industry in distress spur consolidation. The industry remains fragmented, and with no central authority, it is ripe for potential acquisitions and investment opportunities. Some cannabis owners and operators see the issues below as reasons to cut their losses and leave the industry while they can still get a decent return on their cannabis businesses:
Inflation and high-interest rates
Federal illegality (Schedule I status) and the ongoing failure of the SAFE Banking Act to pass the Senate.
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These difficult conditions attract small and large multi-state operators (MSOs) looking—or under pressure from investors if they are public—to consolidate and increase their footprint.
Lawyers like those at Cantafio & Song have extensive experience and an insider's knowledge of regulatory practices and the parlance of the cannabis sector. They can provide the guidance necessary to identify assets, assess the overall health of the business, and consider potential collateral for cannabis businesses considering a merger or an acquisition.
M&A in Cannabis: Similar But Different
The process of M&A in cannabis is more or less the same as in other regulated industries but with a few distinct and unique differences. One of the largest obstacles to a merger or acquisition in the cannabis sector is the difficulty of transferring or selling a cannabis license. In Colorado, for example, it is almost easier to apply for a new license than it is to transfer one. License transfers involve a two-tier negotiation of sorts because once the businesses agree on terms, the state’s Marijuana Enforcement Division (MED) and the city where the transaction will take place must validate the agreement.
It is important to keep the MED (or the appropriate local oversight body) involved throughout the undertaking to be sure that everything is handled properly. If the property is being purchased, there are often many parties involved. The city and the county might require a public hearing. Some municipalities require that cannabis license holders live within the city where the license is issued. Meeting with legal counsel about the particulars of the license and the location early in the process is the best way to ensure you are structuring your agreement terms in compliance with state and local requirements. And remember that the same suitability qualifications for the new licensee must be proven; any rules that apply to the current purchaser must transfer to the buying entity.
Thankfully, if a business is sold to a new owner, it is sometimes possible for the existing owner to retain the cannabis license while the new owner’s license application is pending.
Are any back taxes owed by the business? Is everything in order from a federal, state, and local tax perspective? If the M&A is structured to accomplish a tax-free reorganization where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets, certain strategies should be employed. Stock-for-stock exchanges or stock-for-asset exchanges are possible but difficult due to tight regulatory requirements.
The structure and process of mergers and acquisitions in the cannabis industry can vary significantly, so it is critical to have legal support throughout the entire process to ensure the deal is done legally, smoothly, and to the greatest benefit of all parties involved.
As one of the top cannabis law firms in Colorado, Cantafio & Song understands the complex nature of the cannabis industry and the business issues that can lead to contract disputes. We are also a full-service law firm, and assist clients in other areas of law such as criminal defense, estate planning, litigation, real estate, and more. If you have needs in any of these areas, contact Cantafio & Song’s legal team today.